DP4574 Price Competition in a Differentiated Products Duopoly Under Network Effects

Author(s): Krina Griva, Nikolaos Vettas
Publication Date: August 2004
Keyword(s): network effects, price competition, product differentiation, product variety, quality
JEL(s): D43, L13
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=4574

We examine price competition under product-specific network effects, in a duopoly where the products are differentiated horizontally and vertically. When consumers' expectations are not affected by prices, firms may share the market equally, or one firm (possibly the low-quality one) may capture the entire market. When product qualities are different, we may also have interior asymmetric equilibria. With expectations affected by prices, firms' competition becomes more intense and the high quality firm captures a larger market share.